Category: Due Diligence

A Tale of Brand Compliance Rescue

The Road to Hell is Paved With Good Intentions

Jake started his career as a general manager, working at his former employer’s fitness studio. He connected with the community and ran the studio like a well-oiled machine. Years went by and because Jake ran the studio so well, the community actually thought he was the owner. He was proud of his frugality and ability to confront and fix anything without hiring a specialist.

The thought that Jake’s hard work and the sense of community that he built was going unnoticed by the owner was starting to eat at him. Despite his hard work, at the end of the day, he was making more profit and building more brand equity for the owner of the fitness studio than for himself.

One day, Jake approached the owner with a proposition to buy the fitness business. After some negotiation, they struck a deal and Jake was now the proud owner of the neighborhood health hangout spot. Jake found that he had created and documented systems so well that the fitness studio ran like a well-oiled machine. He shared the secrets to his success with some friends who worked downtown and they saw more potential in this individual location and Jake’s system and suggested that he build a franchise.

Time Flies When You’re Having Fun

A decade went by in the blink of an eye – and during that time Jake built his franchise to 54 fitness studios. Life was good. After more than a decade, it was time to refresh the brand. As part of “Jake’s Fresh Refresh”, he updated the brand guidelines and specified all of the new requirements that his franchisees would need as part of the refresh rollout.

Jake provided each of his franchisees with a huge binder that contained specifications on budget, brand standards, colors, sizes, manufacturers, placement, channel letter component colors, brick demolition tips and tricks, as well as landscape and workout regime changes. The binder also contained vendor contact information where each of the new components could be bought and a list of approved sign vendors, installers, and a list of the required permits. Although there were a lot of branded components that needed to be changed (9 external signs, 8 internal signs and the printing of new studio workout sheets), Jake felt confident that anybody could pick up his binder and follow the instructions to knock out the brand refresh in just a few months.

What Could Possibly Go Wrong?

Jake’s altruistic sentiment was quickly crushed when franchisees started calling him. Initially, they didn’t see how they could possibly run their fitness studios, order all of the rebranded items, coordinate sign vendors, pull permits, and teach new workout routines to their employees – and they were right.

Many of the fitness studio owners were also savvy business leaders and they figured they could ‘comply’ with the new brand standards by producing materials locally and hiring local handymen to install the signs.

“I Should Have Left ‘Well Enough’ Alone!

Jake was excited to start visiting the newly-branded locations. Unfortunately, what he found instead was a disaster. Of the handful of local studios that he visited, almost none complied with the new brand standards. Signs were in the wrong places, manufacturered in the wrong colors, and in some cases, evidence of the previously removed sign was still visible. Once inside, Jake found that even some of the new workout instructions were printed with the old logo.

“This will never do!” thought Jake. “We invested all of this time and money and the end result is worse than before we ever messed with anything. And on top of all that, our franchisees were pulled away from running their studios in order to do these tasks. I should have known better. No one was sitting around with nothing to do before we decided to rebrand. How could I think they could take this on on top of everything else they were already doing?”

Light At The End of the Tunnel

Frantic, Jake and his team began scouring the internet searching for brand compliance rescue companies and anybody who understood their dilemma. What he found was a video about a company called Implementix that could help them implement and maintain brand consistency across multiple locations:

Cost Certainty – research and up front planning guarantees a set price for the entire project

Supply Chain – qualified supply chain experts are vetted so the work is done right, by the right people

Execution – by managing the removal and installation of all assets through to completion, the brand is refreshed per the Franchisor’s exact requirements

Ongoing Management – identification and documentation of all branded assets are maintained on a cloud-based portal

Even If You Are On The Right Track, You Will Get Run Over If You Just Sit There

At first, Jake was skeptical of a company that could make outrageous claims like guaranteeing the price per franchise unit but the clock was ticking and his brand was suffering every day that the old mismatched items were in place – not to mention the growing frustration of his franchisees.

Jake engaged Implementix and within 4 weeks, every single location in their system had the old assets removed and the new ones in place, exactly as Jake’s new brand standards specified: interior and exterior signage as well as their marketing collateral.

The online compliance portal was an added bonus. With one point of contact, the portal allowed Jake and his studio owners to share the burden of brand compliance so that everyone spent more time in their studios and less time on tasks that don’t generate any revenues for the system.

What My Unlocked Front Door Taught Me About Cyber Security

I had an odd experience the other day. I was on the phone working from my home office and I could see a man walking up to my door through my blinds. My house is currently for sale, which has increased the number of strangers knocking on my door. I figured he was going to ask about the house, so I decided to stay on my call since all of the information he would need about the house is on a sell sheet, conveniently located at the edge of the yard. I heard him knock and yell “hello” a few times, but then I thought I heard a different noise – the sound of my security screen door OPENING. I had a quick ‘no way’ moment and swiftly got up to check on the noise, terrified to discover that this strange man was … IN MY KITCHEN!

What Is My Home’s First Line of Defense?

So why am sharing this somewhat personal story? Because it made me think about the conversations I’ve had around cyber security. My screen door serves a security function. Primarily it is an access point into my house, but it is also as a first line of defense to keep unwanted or unknown people or things from entering. Obviously if the screen door is going to be effective as a first line of defense, the door must be locked. A locked door only allows those with authorized access, someone with a key, or someone that I personally allow access to, the ability to enter.

What is Your Company Network’s First Line of Defense?

This, my friends, is much like our first line of defense for our business networks: firewalls are our security screen doors. Firewalls are meant to guard/monitor the traffic that goes into and out of our networks; however, an improperly configured or unmanaged firewall will be as ineffective as my unlocked front door when it comes to keeping bad agents out.

After I escorted the stranger out of my house (who actually ended up being a curious potential buyer), I went around and locked EVERY door that anyone from the street might have access to. Wouldn’t you know it, not even ten minutes later, the same man was back at my door. He tried to walk in again, this time to ask if he could see the backyard, but his efforts were thwarted because I activated the security measure of the door – the deadbolt.

The Moral of the Story

What’s the moral of the story here? Our security is only as good as the end user. You can have processes in place, but if they aren’t being implemented they’re useless. A minor lapse in judgement can leave us vulnerable to all type of threats. Fortunately for me, my intruder was nothing worse than a person who thought it was ok to let himself into my residence. Sadly, that’s not always the case – either at home or with our computer networks. I can almost guarantee a stranger who goes into your network, will be doing more than just “looking around”.

Are you leaving unlocked doors on your network? You can assess your point-of-sale (POS) security risk with this quick Risk Assessment.

N E W B O O K !

Amazon #1 Bestseller

Brick & Mortar Franchise Success: Know The Costs or Pay The Price

Failure is not an option — until it happens! Then what? The purpose of the book is to take the guesswork out of the entire development process so franchisees know exactly what it takes to get their new location open in the least amount of time, for the best overall price and, more important than anything else, without making costly mistakes in the process.

Miller dedicated her book to all the brave entrepreneurs who join the franchise ranks with dreams of opening a successful location.

Her new book hit best-seller lists on Amazon.com within 24 hours of release in both the “Franchises” category as well as the “Entrepreneurship & Small Business” category.

With a Foreword by Rick Grossmann and Michael J. Katz, Esq., authors of Entrepreneur Magazine’s Franchise Bible, “Brick & Mortar Franchise Success” provides roadmaps through the build-out process from calculating a realistic timeline for the project, hiring of the right general contractor, architect and attorney, through the physical reality of the construction process and getting the doors open for business.

Carolyn Miller’s no-nonsense approach to site intelligence and construction management reveals specific strategies that have saved hundreds of franchisees millions of dollars. Many new franchise buyers learn the hard (and expensive) way that setting up a new brick and mortar business is challenging and confusing. The average franchise buyer is in unfamiliar territory and historically many make costly mistakes, which can be the downfall of their business.

Franchising is the fastest-growing method of conducting business in the world. Why? Because it works! But don’t be fooled – success isn’t guaranteed and the stakes are a lot higher when leasing space and building physical locations. “Over the course of a few decades in development with brands such as McDonald’s, Chipotle, and Red Robin just to name a few, I’ve seen millions of dollars wasted on fixing problems that, in many instances, could have been avoided altogether.”

Like most business owners, your primary goal is to operate a successful business. You can’t actually do that until your location opens. While you may know a little bit about a lot of things, the devil is in the details. When you don’t know what you don’t know, especially when it comes to leasing space and building new locations, you could be in for a long, rough ride. The reality of how much you don’t know (and what can happen next!) can be all-consuming. Enthusiasm, persistence, and dogged determination won’t be enough to save you.

Do not, Do Not, DO NOT sign a lease without reading this book!

Once a lease is executed, you are ‘officially’ a business owner – even if your new location never actually opens! A lot of professionals with years of business experience assure themselves that there isn’t any part of the building process that they either don’t know or can’t figure out. What they don’t take into account is the additional time that ticks away while they learn the ropes – and make costly mistakes in the process. No matter how much business experience and success you have had in past roles, if you are not well versed in all that is involved in getting your new location open, failure will find you!

Building new locations hasn’t changed much over the years. Because it happens thousands of times a day across the country, it’s easy to adopt the mindset of, “I can figure this out.” The truth is that you CAN figure it out – but how much will you spend or forego in the process?

Ignorance isn’t bliss — it’s EXPENSIVE!

Failure is not an option – until it happens! Then what? The purpose of this book is to take the guesswork out of the entire development process so you know exactly what it takes to get your new location open in the least amount of time, for the best overall price and, more important than anything else, without making costly mistakes in the process.

Whether you are an independent business owner or a franchisee, if you have plans to lease space to build your first (or your next) location, the book you’re holding in your hands will become one of the most valuable investments you can make!

A Franchisee’s Guide to Due Diligence

The franchise model continues to grow across a wide variety of industries because it works — and works well — especially when new franchisees find the concept of their dreams. When you buy into a franchise system, you are buying more than just a brand name. You are buying a system — a system that is the result of someone else’s knowledge, efforts and experience in order to come up with a complete instruction manual on how to do every single aspect of that business, and do it well, the first time around, not the tenth.

Due diligence is a very important aspect of franchise ownership

Before taking the financial and emotional plunge into franchise ownership, conducting the right due diligence will help ensure future happiness and avoid financial catastrophe.

You will want to make sure that not only is the franchise you’re investing in financially sound, but that it’s also a good fit for your personality and interests, and that the franchise culture is one that you believe in. To get answers to your questions, you will need to do your research – which will include reaching out to other franchisees, and asking hard questions of the franchisor.

Once you’ve done your research and have had all of your questions satisfied, you can make an informed decision about what’s right for you. Take your time and be thorough – this is a big decision!

Quantitative Due Diligence

The first thing that most prospective franchisees want to know about is the money side of things. How much is the initial investment? Also note the franchisor’s ongoing advertising fees and royalties. Those are the easy figures to determine, as they are found in the Franchise Disclosure Document (FDD) – which you’ll receive early on in your conversations with the franchisor (if you don’t, it’s a red flag!). Your franchise consultant will help you tease out what’s important from the FDD – and provide you with resources to help you interpret what you are reading. Later in the process you will want to hire a franchise attorney to dig deeper and protect you from any hidden minefields that may be buried in the fine print.

The harder questions are:

How much can I expect to see in profits as my business grows?

At what point will you break even?

What are the bottom line net margins (EBITDA)?

Those questions are NOT disclosed fully in the FDD, because the federal trade commission does not REQUIRE this information in what is called item 19 of the document. There will hopefully be some partial disclosures, but not full disclosure. This is partly because in every system there are differences in the way individual owners run their books. And partly because these franchises have attorneys – who recommend to their franchise clients that they don’t do anything that could open themselves up for lawsuits. And given that full EBITDA disclosures of ALL franchisees in the system is not industry standard (and frankly not practical to gather data for) the obvious legal recommendation is not to do so.

So how do you adequately discover this information? By a process called validation, which is simply calling numerous franchisees in the system and asking them! They are allowed to tell you anything, and most of them are happy to do so. The contact information for all current franchisees is required to be disclosed in the FDD – as well as those that have left the system in the last three years! So it’s easy but time consuming, and the most important step that should never be skipped.

Here are a few starter questions

What is your annual gross revenue?

How did your initial investment compare to the franchisor’s estimates?

What’s your favorite part of the business?

What are some struggles you’ve faced or that you currently face in the business?

Have you started to cash flow? How long did that take?

Do you feel like you made a good investment? Would you advise your friends and family to invest in this business?

Do you feel you are getting “bang from your buck” with the marketing fees?

There are hundreds of similar questions you can (and should!) ask. You and your franchise consultant can brainstorm a good list given the brand you are researching. Interview as many franchisees – and former franchisees – as you need to feel comfortable. Remember, if it doesn’t feel right, this may not be the franchise for you!

Qualitative Due Diligence

Equally as important as profitability and functionality is the culture of the franchise. Digging into the culture of a potential franchise will help give you an idea if you could be happy running it. When all is said and done, you want to make a sound investment and run your own business on your own time – but you need to be happy doing it!

The #1 Lease Negotiation & Site Selection Mistake

Every franchisee has one primary goal: to operate a successful business. They can’t actually do that until their location opens.

Leases are complicated and create tremendous financial exposure. Finding the best properties and negotiating the best terms are two of the most important tasks that any business owner undertakes because of the far-reaching and long-lasting ramifications.

While there are a number of key things to do right when negotiating leases, far and away one thing stands out as the #1 lease negotiation and site selection mistake that business owners make: NOT ALLOWING ENOUGH TIME!

It takes TIME to research the market and qualify all the possible sites or facility choices, then tour the properties which seem most interesting, and then compare them carefully. While timeframes vary by market, the normal time to do just this step is about a month, especially if you intend to allow time to hear back from Brokers and Owners on “unlisted” properties: those properties where a Tenant is in place, but could move out (or be moved out) if a replacement occupant is found. Consider, too, the supply and demand factors that play a role with restaurant and retail locations. Even then, these tasks are only the tip of the “time drain” iceberg. Other tasks need to be factored into the site selection time-line.

Negotiations

Typically done with Letters Of Intent (LOIs) or Requests For Proposal (RFPs), negotiations with the Landlord can span weeks or even months if the landlord is a big company with a real estate committee that meets once a week. Terms are battered back and forth like a tennis ball. Perhaps bids need to be obtained for various items before either the Landlord or the Tenant will agree to certain work. It is not unusual for things to seem to drag on forever.

Preparation of the Lease

Once the financial terms are agreed upon, a new round of negotiations commences: the principals, brokers and attorneys need to battle back and forth over the wording of the lease, and the “devilish-details” can easily bring up new issues of disagreement that need resolution. This can easily take weeks.

Renovations

Once the lease is signed the premises often needs finishing or renovating, which can add additional months. Rooms are never the right size, and even when they are, you may want a different style of floor plan. If it’s an open floor plan, YOU want private offices, or vice versa. Happens all the time! I have seen offices installed exactly the way they used to be – before the most recent tenant ripped everything out to make an open floor plan.

Permits

Before renovations can begin, building permits must be obtained. This will take additional weeks – perhaps much longer if the municipality is “backed up”, and don’t forget it is common for plans to be rejected for one reason or another and require revisions, and then resubmission.

Architectural Plans

Need building permits? Then you need architectural plans! How busy is the architect and how detailed are the drawings? This can easily take one to two months. If the architect is busy it may be a month before he/she can START the work.

Bottom Line

Unless existing facilities can be found with the right floor plan and features, the process can easily take 9 months to a year – horror stories abound in the industry of it taking even longer. Depending on the size and complexity of the transaction, six months to a year is a reasonable time frame to use when looking for new locations – and longer is necessary (perhaps another six months) if you will be building from the ground up.

The timeframe above assumes that experienced planners have been retained to guide the process. Their expertise plays a significant role in proactively averting problems that might otherwise lead to unforeseen delays.

This article was contributed to the National Franchise Institute by Craig Melby with LeaseSmart (561) 886-8645